Q on lease to own and mortgage payoff

[mousebandit]

We just sold our former primary home on an owner carry, wraparound mortgage.  Which means the buyer gave us a substantial down, makes aggressive monthly and quarterly payments, and will be paid off in 3 years. 

We keep title and taxes in our name, and continue to pay our existing mortgage on the loan, which is with a private lender at 10%.  Yeah, not a typo.  Amortized with like 25 years left. 

Talked to. A tax guy, and he says treat it as a rental until we are ready to transfer title, then treat as cash sale.   So I need to figure out expenses and depreciation and such on that.

First off, does this sound right?  I'm going to dig into irs website, but I would think they've got a procedure for declaring it sold when the payment is not all up front. 

My other big question, is where to focus the incoming money?   Our current plan is to put all incoming money into our debt, which will be paid off in a few months.  Then put incoming money towards our new property and house, to pay them off by February.  Two different private notes: property note has a balloon payment due in March and must paid in full then (owe about $34,400).  The note on the house is open ended and we owe $10,500.  Neither note has any interest.

After payoff of new home and property, slam all incoming receipts to the existing mortgage against the sold property, which has about $45,000 still owed, principle. That gets paid off about the beginning of the third year of buyer payments, and gives us the final year of receipts as profit. 

Should I instead be slamming as much as possible onto the 10% existing mortgage on the sold property, or is the 3-year payoff short enough that it won't matter much?  Refi isn't possible - the home doesn't qualify for conventional lending. 

We have to focus on debt payoff first, then ensure that the new land is paid off by March, but there's wiggle room with the new house note. We're paying $500/mo on it, and could drag it out nearly 2 years instead of paid off in one year.  We also will soon have $2000 or more per month to be investing.  Not sure if all this should go to high interest mortgage on "rental" or if the interest expense makes it better to invest those funds in vanguard or 401k, etc. 

FWIW, my husband is still not fully mmm, and having the house and property paid off is a big deal to him. 

Thanks! 

[mousebandit]

Answer to the first part of my question:  is this a home sale, or is it a rental or lease to own, like my tax buddy said? 

It's not sold!  Per IRS Publication :
If you did not receive Form 1099-S,   the date of sale is either the date the title transferred or the date the economic burdens and benefits of ownership shifted to the buyer, whichever date is earlier. (In most cases, these dates are the same.)

So, since the economic burdens and benefits (title, mortgage in our name, property taxes, etc) are still with us, not the buyer, the IRS treats these OWC wraparound contracts as rentals or leases. 

Still would love to hear thoughts on paying off high-interest mortgage vs deducting interest as rental expense. 

Thanks!

MouseBandit

[mousebandit]

Update to the question of whether it is a sale or a rental:  while the IRS publication says that it's not a sale until title transfer or the transfer of economic burden and ownership benefits, the tax courts have regularly treated installment sales with delayed transfer of title and outstanding underlying mortgages as sales. 

So, in our case, the very low basis that we have in the property means that we would be reporting lots in rental profits if we went that route.  If we treated it as an instLlment sale, all profits are excluded and nontaxable. 

Still unclear if we can deduct property taxes and mortgage interest on our schedule A, though. 

MouseBandit